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COT: Commodity short sellers left exposed as dollar drops
Ole Hansen
Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, September 6. A week that saw a sharp deterioration in risk appetite with global stock markets responding negatively to concerns about global growth and sharply higher bond yields as central banks signalled willingness to hike rates agressively. The commodity sector dropped by more than 4% in response to these developments, resulting in a broad reduction in hedge funds positions, most notably in crude oil, natural gas, gold and soybeans
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to Tuesday, September 6. A week that saw a sharp deterioration in risk appetite with global stock markets responding negatively to concerns about global growth, not least in China where lockdowns spread again. In addition, the prospect of sharply higher rates by central banks to combat runaway inflation saw US bond yields spike while the Bloomberg Dollar Index hit a fresh record high.
Commodities
The commodity sector dropped by more than 4% in response to the deteriorating growth outlook with the stronger dollar adding an additional layer of uncertainty. All sectors suffered losses led by energy and industrial metals and speculators reacted accordingly by cutting bullish bets across 19 out of the 24 major commodity futures markets tracked in this report. The 138k lots reduction was the result of 74k lots of longs being sold and 64k lots of fresh short positions being added. A development that supported the bounce that followed last Tuesday’s reporting deadline when the dollar reversed lower, thereby supporting a general recovery in risk appetite.
Energy:
Funds sold a combined 38k contracts of crude oil and fuel products in a week where China and global demand worries, as well as the stronger dollar helped trigger steep losses across the five crude oil and fuel product futures tracked in this update. In addition, the overall market participation continued to decline with the total open interest falling to 4.8 million contracts, the lowest level of open interest since November 2014.Crude oil drifted lower during the reporting week to last Tuesday and with key support not being challenged until the following day, the main change was a 17.5k lots reduction in the Brent gross longs while the WTI held steady with both and long and short positions seeing small increases. The natural gas net short more than doubled to 49k lots after the notoriously volatile contract slump around 10% below $8 per MMBtu just two weeks after hitting $10 per MMBtu for the first time in 14 years.
Metals:
The metal sector, led by gold, saw broad selling in response to multiple headwinds, the most important being the stronger dollar, rising treasury yields and China growth worries. The latter hitting copper and with that also silver, the result being additional short selling lifting the silver net short to a 40-month high at 24.6k lots. The overall net reduction of 30k lots was driven by a 4k lots reduction in longs and fresh short selling of 26k lots, a development which just like energy raised the risk of a short-covering rebound should the technical and/or fundamental outlook become more supportive. This is what happened after Thursday’s ECB meeting and verbal intervention by Bank of Japan officials helped weaken the dollar.
Agriculture
Funds turned net sellers of the grain and soybean sector for the first time in six weeks. The relatively small 15k lots reduction was driven by reductions across the three soybean contracts. Buying of corn meanwhile extended to a sixth week while speculators maintained an overall short position in CBOT and Kansas wheat futures. In softs, some of the recent strong buying was reversed led by sugar and cocoa.
Forex
Speculators responded to continued dollar strength in the week to September 6 by increasing bullish bets via the Dollar index and against nine IMM futures. The 10% jump in the combined dollar long to $20.2 billion, a five-week high, was primarily driven by heavy selling of GBP and JPY. The Sterling net jumped 63% to 50.4k lots ($3.6 bn) while the 3% depreciation of the JPY drove a 52% increase in the net short to 58.2k lots ($5.1 bn).
It was however interesting to note that renewed EURUSD selling below parity helped attract the first major round of short covering in four weeks. Fading momentum and negative divergence between the falling price and rising RSI pointed to selling fatigue and traders growing wary ahead of Thursday ECB rate decision.
What is the Commitments of Traders report?
The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.
Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)
The reasons why we focus primarily on the behavior of the highlighted groups are:
- They are likely to have tight stops and no underlying exposure that is being hedged
- This makes them most reactive to changes in fundamental or technical price developments
- It provides views about major trends but also helps to decipher when a reversal is looming
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